Are freebies good for economic health and can they empower the poor?

Does India need freebies from the government to survive? What is now popularly called the ‘freebie politics’ has its own economic implications. As the proverb goes there are no free lunches, freebies in the form of free units of power can be detrimental for the economy. Though welfare schemes are common and need for a country like India, there is a thin line between welfare schemes and free distribution.

This is what Dr Bhamy V.Shenoy discusses in its 4-part series on economic freebies. Part 1 of the series follows below:

Are economic freebies a boon or a bane for the poor?

One of the oft repeated arguments against freebie is that it can result in unmanageable deficit and create economic havoc. Still political parties can win elections by offering all kinds of freebies. However our constitution makers anticipated such a situation. They have provided guard rails to stop such behavior on the part of political parties of ever increasing freebies.

Politicians especially from the AAP claim that India’s constitution allows them to offer welfare measures. At the same time the same constitution through Articles 292 and 293 mandate borrowings to be within limits. The Constituent Assembly of India discussed these articles on 10th August 1949 led by H V Kamath and Ananthasayanam Ayyangar. To quote them,” So far as borrowing is concerned they may be short or long-term imposing heavy obligations upon not only the present generation but future generation also”. How true.

Let us take a look at the research findings of international institutions (International Monetary Fund, International Energy Agency and the World Bank) and academicians who have studied the controversial topic of subsidy in different parts of the world.

Their findings show that a subsidy like Gruha Jyothi (subsidizing power consumption) is harmful and in the long run affect the very poor people it is expected to help. However all of them do support giving conditional or unconditional benefits in the form of cash to needed families. In fact even the concept of minimum guaranteed income (Graha Lakshmi is one such admirable guarantee and so also earlier Bhagya Lakshmi) is justified if financial conditions of the countries allow such schemes and keep deficit within limits.

In 2010 Iran successfully replaced offering subsidized fuels by giving cash transfer. Even though petrol prices increased by 400% and diesel prices by 900%, subsidy reform was widely accepted. Like Iran, Jordon implemented similar subsidy reform in 2015 with equal success. In fact way back in 1997, five million poorest families were helped in Mexico with conditional cash transfer (if they send their children to school) and was a great success. Similar success stories of cash transfers instead of subsidyhave succeeded in Yemen, Mauritania, and Morocco.

Economic historians will have a challenging task to figure out why India took many years to learn from all these successful efforts.